🥗 Free lunch

Good morning! Today, we talk about the massive tax privileges enjoyed by Brazil’s rich. How fires have devastated Brazilian biomes. And a push for even more Central Bank independence.

If you like our work and want to give us an extra boost, you can fill up our reporters’ coffee mugs. Supporters get exclusive perks! Find out more.

There is such a thing as a free lunch (for Brazil’s rich)

A week after Brazil’s Federal Accounts Court warned the government about the country’s excessive amount of tax waivers — which now amount to almost 5 percent of the GDP — a union representing tax auditors gave new contours to the problem.

• Unafisco launched its latest “Tax privilege-o-meter,” according to which Brazil is set to lose BRL 789.6 billion (USD 145.65 billion) to undeserved tax privileges this year alone.

• The union classified a tax waiver as a privilege when there is no proof that it effectively promotes the development of the Brazilian economy.

Loopholes. A 2021 constitutional amendment capped the amount of tax waivers at 2 percent of GDP, but the main such programs were excluded from the calculation. According to Unafisco, these are mostly enjoyed by rich taxpayers — either individuals or corporations.

What they are saying. The size “appalled” President Luiz Inácio Lula da Silva, according to Planning Minister Simone Tebet. The president would prefer for his government to meet fiscal targets by jacking up revenue instead of cutting spending, but the sheer power of corporate lobbies makes such benefits hard to do away with.

 Why it matters. Concerns about the state of public accounts are increasing risk perception around Brazil — putting pressure on the currency, stock market, and yield curves. 

• While Finance Minister Fernando Haddad has committed to curbing public spending, markets want guarantees that the fiscal rules set last year will not be changed once more. 

• In 2024, less than a year after it approved the current fiscal framework, the government asked Congress for a laxer fiscal target for 2025: it wants a zero-deficit goal instead of a surplus of 0.5 percent of GDP.

Big beneficiaries. Data from the Federal Revenue Service shows that giant companies Petrobras (oil and gas, state-controlled) and Vale (mining) were granted BRL 11.8 and 6.4 billion in tax waivers, respectively. Other industry titans such as Latam (aviation), Samsung (electronics), and Stellantis (carmaking) also had their tax bills slashed.

You take, you give. With the Lula administration scrambling to increase revenue, Petrobras agreed to pay BRL 19.8 billion in back federal taxes. The deal, announced in a securities filing, is the first major decision under the company’s new chief executive, Madga Chambriard.

Forty years of fire

Wildfires registered in Brazil between 1985 and 2023 affected an area the size of Mexico, according to data published this morning by monitoring platform MapBiomas. The numbers suggest that one in every four hectares of Brazilian land was burned in the last 40 years.

• Amid the country’s expanding agricultural frontier, Brazil’s Pantanal wetlands and Cerrado savanna are the likeliest biomes to have wide-ranging fires.

• Most fires in the Cerrado spread between 1,000 and 5,000 hectares. In the Pantanal, fires can affect areas twice as big. 

 Why it matters. The Cerrado is the world’s most biodiverse savanna and the birthplace of the three largest river basins in South America. Protecting it efficiently depends on an understanding of the biome’s fire patterns and is pivotal for the continent’s climate (and the world’s, for that matter).

The dose makes the poison. Federal authorities are using controlled fires to prevent blazes from becoming unmanageable in the Cerrado. The idea is to reduce the amount of flammable material available, such as grass and dry leaves, before the worst months of the dry season.

By the numbers. Despite their different sizes, the Cerrado and the Amazon are home to 86 percent of the area burned at least once in Brazil between 1985 and 2024 (almost 200 million hectares), in practically equal quantities.

• The Pantanal is the biome that burned most in proportion to its area — with almost 60 percent, or 9 million hectares, suffering from blazes. 

What they are saying. “The Cerrado has suffered from high rates of deforestation, which results in an increase in fires and the risk of them becoming uncontrolled, altering the natural fire pattern,” said Vera Arruda, the technical coordinator of the MapBiomas Fire project.

On the horizon. Agricultural expansion in the Cerrado has been driven by exports to China, amid the tightening of environmental rules imposed by the European Union. However, Xi Jinping’s government signals that it will also tighten import rules, which has encouraged the Chinese market to become stricter around environmental standards.

The big picture. Each year, an average of 18.3 million hectares — or about 2 percent of the country — is affected by fire. Moreover, 60 percent of all areas burned were on private land, and almost half were concentrated in three states: Mato Grosso, Pará, and Maranhão.

Central Bank Inc.?

The Senate’s most important committee will today hold a hearing on a proposal to amend the Constitution and turn the Central Bank into a public company, giving it full budgetary and financial autonomy. The bill’s rapporteur contends that the bank must be able to conduct its activities without the possibility of the government using budgetary constraints as a threat.

• The Central Bank’s budget would no longer depend on transfers of taxpayers’ money. Instead, the bank would use revenue “generated by its assets to cover personnel expenses, general costs, investments, and others.”

 Why it matters. Since 2021, the Central Bank has enjoyed operational autonomy to pursue inflation targets and encourage full employment. Its board of directors is appointed for four-year terms that do not coincide with presidential terms. During that time, its members enjoy ironclad stability as a way to shield the bank from government pressure.

• For instance, the current Central Bank chairman, Roberto Campos Neto, named by the former far-right President Jair Bolsonaro, will serve until the end of this year — two years into the term of leftist President Luiz Inácio Lula da Silva.

• Unsurprisingly, that has led to friction — with Mr. Campos Neto becoming a lightning rod for the government’s vitriol over benchmark interest rates. Just this morning, Lula said the chairman acts politically and “aims to hurt Brazil” with sky-high interests.

Yes, but … International economists see Brazil’s independent Central Bank as a success story, pointing out that the country’s economic tightening has been necessary amid inflationary pressures.

Different views. Mr. Campos Neto contends that the bill will “modernize” the Central Bank, while Finance Minister Fernando Haddad disagrees with parts of the draft, claiming that the bank is already autonomous. Meanwhile, most Central Bank employees are against the bill, as it caps the growth of personnel expenses to no more than the rate of inflation.

Quick catch-up

The Brazilian currency and stock market performed poorly on Monday, as expectations around the economy continue to sour. A weaker currency also leads to higher inflation, as the dollar’s value affects numerous elements, including transportation costs.

Rio Grande do Sul lost about one-quarter of its revenue from ICMS consumption tax, according to state officials. The losses occurred between May 1 and June 12.

A survey of 1,001 Brazilians showed great acceptance of the introduction of a “sin tax.” Two-thirds of respondents were in favor of more expensive alcoholic beverages as a way to deter consumption.

The Supreme Court is expected to decide on whether to accept charges against the alleged masterminds of the 2014 murder of Marielle Franco. Congressman Chiquinho Brazão and his brother Domingos, a Rio accounts court member, are accused of ordering the hit.

The post 🥗 Free lunch appeared first on The Brazilian Report.